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RBI Says Economy will Grow 7.4% Next Fiscal Year, Leaves Benchmark Interest Rate Unchanged

Image for Representation.

Image for Representation.

On November 8 the Prime Minister announced that the government was pulling out 500 and 1,000 rupee banknotes, 86% of the cash in circulation, in order to rein in counterfeit currency and smoke out black money. The move disrupted the economy, including a fall in private consumption and investment.

Mumbai: The Reserve Bank of India has projected that the economy will recover sharply from Demonetization and expand to 7.4% in the next fiscal year, even as it left its benchmark interest rate unchanged.

The monetary policy committee of the RBI held the repurchase rate at 6.25%, surprising the markets and economists who expected a rate cut in order to support the economy.

In doing so the RBI has opted for caution rather than playing a supportive role for an economy that they believe is recovering from the transitory affects of Demonetization. Apart from inflation, the RBI also cited rising global energy prices and uncertainty around U.S. macroeconomic policies to support its decision.

The repurchase rate (repo rate) is the benchmark interest rate of the Indian economy and is the rate at which the central bank lends money to commercial banks, which in turn extend that money for things like home loans, car loans and finance for infrastructure. An increase in the repo rate makes loans more expensive, thus reducing demand for them and crimping economic activity, while a reduction has the opposite effect of boosting the economy.

"The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetization,” the RBI said in the monetary policy document.

The central bank said that consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17 and that economic activity in cash-intensive sectors such as retail trade, hotels and restaurants and in the unorganised sector is expected to be rapidly restored.

These would help economic growth to recover rapidly from the shock of cash demonetization, the central bank said.

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